Net Present Value, Return on Investment, and Profitability Index
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You have been hired in the finance department at a large, metropolitan for-profit hospital. Your duties are very important to the entire hospital in terms of financing operating costs. Additionally, you are also in charge of 3 employees who work under you to help with the day-to-day accounting activities. Your role includes budgeting, managing the general ledger accounts, utilizing financial formulas to perform accounting activities, and training and development of your 3 employees. This professional career is exciting and challenging for you but is also enjoyable and rewarding as you work your way up the career ladder toward reaching your goal of becoming the chief executive officer (CEO) of the hospital.
Due to scarce resources, your organization is faced with the decision of choosing between mutually exclusive projects (I.e., Build a Rehab. Center or Build a Neonatal Wing). You have been asked to develop a financial analysis of two projects and based on Net Present Value (NPV), Return on Investment (ROI), and Profitability Index (PI), explain which project is best to implement.
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Solution Summary
The solution determines the NPV, ROI and PI.
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Running Head: EVALUATION OF FINANCE PROJECT
Evaluation of Finance Project
Introduction
A person in finance department is responsible for several activities such as financing operating costs, training the people, who are responsible for day-to-day accounting activities, prepares budgets and manages different general ledger accounts. If people efficiently play this role, they can become chief executive officer or chief finance officer of any company. This paper discusses about how a person, who is responsible for finance department of a for-profit hospital takes the decisions of choosing one project between two mutually exclusive projects.
Evaluation of Two Mutually Exclusive Projects
Mutually exclusive projects are those projects, which are competitor of each other and used for the same purpose by an organization. If companies choose one project, it is necessary that they exclude other project (Moyer, McGuigan & Kretlow, 2008). In hospital organization, there are two mutually exclusive projects, first is, Build a Rehab center and second is Build a Neonatal Wing. It is assumed that investment cost and cash inflows of these two projects are according to the figure 1 that is as below:
Figure 1:
Cash flows Build a Rehab center (in $) Build a Neonatal Wing (in $)
C0 (Cost) 8000 8000
C1 (Inflow) 2000 2400
C2 (Inflow) 1500 2000
C3 (Inflow) 1200 1600
C4 (Inflow) 1000 1200
It is assumed that tax rate is 40% and depreciation is ...
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